South Africa: South African Courts — Establishing A Trend In Business Rescue Judgments

Last Updated: 10 January 2012
Article by Keith Braatvedt

The first case relating to Chapter 6 of Act 71 of 2008 (the Act), being the business rescue chapter, was decided by the Honourable Makgoba J in the North Gauteng High Court (case 26597/2001 – Riaan Swart as applicant and Beagles Run Investments 25 (Pty) Ltd and others as respondents). In paragraph 16 of the judgment Makgoba J quoted the preamble to the Act as follows: "to provide for efficient rescue of financially distressed companies."

Correctly, Makgoba J said the purpose of Chapter 6 was to assist a financially distressed company by means of a business rescue plan in order to maximise the possibility of the company continuing on a solvent basis, or to achieve a better return for the company's creditors or shareholders in comparison to a liquidation.

The facts in the Beagles Run case were that the respondent was financially distressed but merely needed time in order to dispose of immovable assets in order to pay his creditors. Makgoba J posed the question whether there exists a reasonable prospect of rescuing the company (section 131(4)(a)). A consideration of this part of section 131 is essential because this is the basis on which the court will exercise its discretion.

In this matter Makgoba J made a factual finding (based on the affidavits of the first and second intervening creditors) that the respondent, in this matter, was insolvent and the judge agreed with the contention of counsel acting for the intervening respondents that the applicant was being "less than frank and lacks the bona fides in bringing this application".

Most importantly, at paragraph 37, Makgoba J emphasised that the court does have a discretion even though the requirements of section 131(4)(a)(i) to (iii) have been made out. The judge exercised his discretion against the applicant and concluded that there was no basis for saying the business could be carried on a solvent basis or that there is any prospect thereof and that no case had been made out that the granting of a business rescue will place the creditors of the respondent in a better position than they would be in a winding up.

I think that the judgment of Makgoba J is correct and gave positive and useful direction. It has been usefully supplemented by the judgment of the Honourable Acting Justice Eloff decided in the Western Cape High Court under case number 15155/2011 in the matter between Southern Palace Investments 265 (Pty) Ltd as applicant and Midnight Storm Investments 386 Ltd as respondent with The Registrar of Banks and Zoneska Investments (Pty) Ltd as first and second intervening parties.

The Honourable Eloff AJ quoted from section 7(k) of the Act which says that the purposes of business rescue are to "provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders".

Eloff AJ states in paragraph 3 of the judgment that the purpose is to achieve an essential breathing space while a business rescue plan is implemented by the business rescue practitioner. The judge, however, cautioned against the possible abuse of the business rescue procedure by rendering the company temporarily immune to actions by creditors to enable the directors or other stakeholders to pursue their own ends.

Importantly, the judge said that "it is necessary that an application for business rescue be carefully scrutinised so as to ensure that it entails a genuine attempt to achieve the aims of the statutory remedy". The judge in this case found that no genuine attempt was discernible from the affidavits filed of record and accordingly the judge said he was not prepared to exercise the discretion as provided for in section 131(4). He accordingly dismissed the application for business rescue and placed the respondent in provisional winding up.

The learned judge then considered the meaning of the term "reasonable prospect" used in section 131(4). The judge decided that the term "reasonable prospect" indicates that something less is required than in court 427(1) of the Companies Act 61 of 1973 (judicial management) where a "reasonable probability" was required. The judge very correctly, in my view, said that the mindset in previous cases dealing with judicial management was that prima facie the creditor was entitled to a liquidation order and only in exceptional circumstances would a judicial management order be granted. The judge emphasised that the approach to business rescue in the new Act is the opposite, namely that business rescue is preferred to liquidation, but most importantly the court still has a discretion not to grant the business rescue order.

The Honourable Eloff AJ said it would be inappropriate for a court faced with a business rescue application to maintain the mindset (from the earlier regime) that a creditor is entitled ex debito justitiae to be paid or to have the company liquidated.

Eloff AJ then focused in detail on the facts of the matter and commented that the respondent did not initiate business rescue proceedings by way of resolution under section 129 of the Act and found that on vague and undetailed information before the judge there was no reason to believe that there could be any prospect of the respondent being restored to a successful business. A comment was made by the judge that not even a concrete business rescue plan was made available for consideration.

In paragraph 24 of the judgment it is stated that while every case must be considered on its merits, a business rescue plan will not have a reasonable chance of success unless it addresses the cause of the demise or failure of the company's business and offers a remedy therefor that has a reasonable prospect of being sustainable. The emphasis in the judgment was that a business rescue plan which is unlikely to achieve anything more than to prolong the agony by substituting one debt for another without there being light at the end of the tunnel will certainly not be sufficient.

I am of the view that this is a very strong and well-reasoned judgment. What can be gained from the judgment is that when an application is made to court there should be a detailed proposed business rescue plan modelled on Part D of Act 71 of 2008. This must be fully motivated and explained to the court and unless this is done then the judges (correctly in my view) will exercise their discretion against granting business rescue.

Shortly put, an application to court should not be a kneejerk reaction but should only be brought after the business rescue plan has been comprehensively planned and prepared. These comments apply specially to an application in terms of section 131(6) where liquidation proceedings have already been commenced by or against the company and an application for business rescue is brought. In this case the business rescue application will suspend the liquidation proceedings. In my view, in these circumstances, a well-researched and motivated business rescue plan can, if correctly presented, end opposed liquidation proceedings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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